As announced in the Autumn Budget 2017 and Spring Statement 2018, the Government is keen to explore ways to tackle those who deliberately abuse the insolvency regime to avoid or evade their tax liabilities. In spring we saw the launch of a consultation to seek views on how to tackle the problem.
Although we share HMRC’s concerns that a small minority of taxpayers are abusing the insolvency process to sidestep their tax liabilities, we do have some concerns about the direction of travel.
First, the consultation doesn’t outline the extent of the problem. Without quantifying where, as a consequence of insolvency, the abuse comes from, its extent and its value, it is difficult to assess what steps need to be taken to prevent tax abuse involving insolvency.
We appreciate that HMRC is an unintentional and unavoidable creditor, and in many cases is the majority creditor. However, any proposals need to also protect other creditors and we are concerned that the proposals to broaden the scope to make directors personally liable for tax losses could impact upon the pari-passu (equal footing) concept in insolvency, which could disadvantage other creditors and effectively give HMRC preferential status. The risk of personal liability could result in HMRC being preferred over other creditors.
We feel more thought needs to go into how recalcitrant directors are identified as being deserving of a personal liability order for tax revenue losses. It would seem the answer could be closer working between HMRC and BEIS (which has responsibility via the Insolvency Service for director disqualification), so that the focus is clearly on the directors who deliberately cheat the system rather than those caught up in a genuine business failure.
Introducing the concept of guarantees or deposits to protect HMRC’s position generally could act as a barrier to trade and inhibitor to an entrepreneurial economy, as well as increasing the cost of doing business in the UK.
If HMRC is committed to rebalancing the position, it is important that the position of HMRC versus unsecured creditors is established and quantified. In addition, HMRC needs to work closely with insolvency practitioners (IPs) to ensure that any action taken by HMRC does not prejudice any actions contemplated or being taken by the IP.
Ultimately, we believe IPs have sufficient tools to address tax abuse involving insolvency and, if applied robustly and consistently, this should be a sufficient deterrent to drive out bad practices and prevent directors abusing the insolvency process to avoid tax liabilities.
However, a primary issue for IPs is often a lack of funding to exercise their investigatory powers to take robust action in each relevant case that sends a clear message that action will be taken to stamp out rogue directors. If more funding could be made available from concerned creditors such as HMRC, it would show that IPs have the ability to, and will where appropriate, investigate abusive behaviour to the fullest extent possible, which should act as a key preventive measure.